Vietnam freight transport report q3 2013

... International Page 33 Vietnam Freight Transport Report Q3 2013 Road Dominates Freight Mix Vietnam Freight Transport Mode Breakdown (% of Total 2013f) Source: General Statistics Office of Vietnam Vietnam's... Vietnam further into the camp of Asian nations with close relations with the US © Business Monitor International Page Vietnam Freight Transport Report Q3 2013 SWOT Freight Transport Vietnam Freight. .. Business Monitor International Page 10 Vietnam Freight Transport Report Q3 2013 Vietnam Freight Transport Industry SWOT - Continued ■ Growing international interest in Vietnam as a growth market within

Q3 2013 www.businessmonitor.com

VIETNAM

FREIGHT TRANSPORT REPORT

INCLUDES 10-YEAR FORECASTS TO 2022

Q3 2013

INCLUDES 10-YEAR FORECASTS TO 2022

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: April 2013

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BMI Industry View 7

SWOT 10

Freight Transport 10

Political 12

Economic 13

Business Environment 14

Industry Forecast 15

Road Freight 18

Table: Road Freight 20

Inland Waterways 20

Table: Inland Waterway Freight 22

Rail Freight 22

Table: Vietnam Transport Network Length (km) 22

Table: Rail Freight 23

Air Freight 23

Table: Air Freight 25

Maritime Freight 25

Table: Maritime Freight 27

Trade 27

Table: Trade Overview 27

Table: Key Trade Indicators 27

Table: TOP IMPORT DESTINATIONS, 2004-2011, US$mn 28

Table: TOP EXPORT DESTINATIONS, 2004-2011, US$mn 29

Market Overview 30

Industry Trends And Developments 37

Maritime 37

Multimodal 39

Rail 40

Air 40

Company Profile 41

Vietnam Airlines Cargo 41

Vietnam Petroleum Transport Company (VIPCO) 43

Vietnam National Shipping Lines (Vinalines) 45

Regional Overview 48

Political Outlook 48

Domestic Politics 48

Table: Vietnam Political Overview 49

Long-Term Political Outlook 50

Global Industry Overview 54

Global Oil Product Price Outlook 54

Methodology 54

Crude Price Forecasts 55

Table: BMI's Oil Price Forecasts, Average Price (US$/bbl) 55

Early Rally Turns Into Run-Off 55

Table: BMI's Refined Products Forecasts, US$/bbl 59

Supply: Refining Capacity Expansion Sets Tone 60

Naphtha: Global Economic Outlook Weighs On Prices 64

Gasoline And Gasoil/Diesel: The Green Effect 65

Jet Fuel: Freight Continues Slump 66

Table: Total Air Freight & Passenger Volumes 66

Bunker Fuels: Efficiency Takes Hit On Demand 67

Macroeconomic Forecasts 69

Economic Analysis 69

Table: Vietnam - Economic Activity 72

Demographic Forecast 73

Table: Vietnam's Population By Age Group, 1990-2020 ('000) 74

Table: Vietnam's Population By Age Group, 1990-2020 (% of total) 75

Table: Vietnam's Key Population Ratios, 1990-2020 76

Table: Vietnam's Rural And Urban Population, 1990-2020 76

Methodology 77

Transport Industry 78

Sources 78

BMI Industry View

Vietnam's real GDP growth accelerated from 5.1% year-on-year (y-o-y) in Q312 to 5.4% in Q412,

reinforcing our view that the economy is poised for a robust recovery in H113 Also, Vietnam's tradesurplus expanded in February 2013, amid a sharp decline in imports Exports surpassed imports by US

$900mn in February, after a revised US$776mn in January, according to preliminary figures released by theGeneral Statistics Office Imports fell to US$6.6bn in February from a revised US$10.7bn in January, whileexports slipped to US$7.5bn from a revised US$11.5bn over the same period

Over the past two years, Vietnam's infrastructure sector has largely been off the radar among foreigninvestors, meaning that the country's freight industry has perhaps had cause to feel a little neglected This isdespite numerous project opportunities cropping up Latest estimates from the Vietnam Ministry of

Planning indicate that Vietnam needs around US$160bn being made available for infrastructure

development between 2013 and 2020

The lack of a comprehensive PPP framework, decade-low economic activity and slowdown in projectfinancing from European banks due to the European sovereign-debt crisis have exposed deep fault-lines inthe country's business environment for infrastructure These frailties include excessive investment in certaininfrastructure segments (ie, roads, cement), slow land clearances, poor planning, high levels of corruptionand a weak regulatory environment

Although these business environment issues are far from resolved, we believe that improving economicconditions and a willingness by the Vietnamese government to resolve some of the underlying drivers forthese frailties are improving the investment climate for infrastructure and, by extension, the Vietnamesefreight industry

Headline Industry Data

■ 2013 rail freight tonnage is set to increase by 4.12% to 7.29mn tonnes

■ 2013 air freight tonnage is forecast to rise by 13.64% to 203,080 tonnes

■ Tonnage handled at the Port of Ho Chi Minh City in 2013 is forecast to grow 7.56%, whereas tonnagehandled at the Port of Da Nang is forecast to increase 4.26%

■ 2013 road freight tonnage is forecast to grow by 11.7% to 820.5mn tonnes

■ 2013 total trade is forecast to rise by 5.60%

Key Industry Trends

Global Economic Pick Up To Support Ho Chi Minh Port Growth - Annual tonnage throughput growth at

the Port of Ho Chi Minh is set to come in at a healthy 7.56% in 2013, to reach 38.75mn tonnes, downslightly on the previous year's estimated y-o-y increase of 7.71% Container throughput is predicted toperform even better, forecast as it is to reach growth of 8.22% in 2013, almost twice as fast as our estimated

2012 expansion rate of 4.35% This will see container throughput reaching 3.22mn TEUs This faster rate ofgrowth is in keeping with our macroeconomic outlook on Vietnam, where we forecast that real GDP growthwill accelerate from 5.0% in 2012 to 7.0% in 2013

Logwin Reports Growth In Eastern China-Vietnam Trade Lane - Germany-based freight

company Logwin has seen growth on its Eastern China to Vietnam trade lane across a range of industries,

including IT hardware and garments, in 2012, reported JOC at the end of February 2013 The company'smanaging director for the Far East region Tomas Sonntag said the growth has turned the Eastern China toVietnam route into 'one of the larger trade lanes in intra-Asia for Logwin'

Vietnamese Rail Line Will Cost US$2bn - The president of Russian Railways (RZD), Vladimir Yakunin,

has explained his belief that an investment in the construction of a new rail line in southern Vietnam willcome in at more than US$2bn

Key Risks To Outlook

A proposal for Japan-based Nexco Central Company to become an investor of the upgraded Phap

Van-Cau Gie highway project in Vietnam has been submitted by the Ministry of Transport, it was reported inApril 2013 Nexco will become an investor in the project under a build-operate-transfer (BOT) contract

The decision to select Nexco instead of Vietnam's Hai Chau Group took six months, the ministry stated If

the proposal is accepted by the government, then the Phap Van- Cau Gie project will become the firstforeign-invested highway project in the country The proposal calls for upgrading the current 30km stretchinto an expressway with four lanes The project will attract a total investment capital of VND1.5trn (US

$71.4mn), with the construction is expected to be concluded within one year

Meanwhile, work on the north-south high-speed railway project in Vietnam should be delayed with thefocus shifted to upgrading the current north-south track, according to a proposal by state-owned TransportEngineering Design Inc (TEDI) Additionally, the speed of the north-south high-speed train should beslowed down to 150-200km an hour from more than 200km an hour, TEDI added The time frame for thedevelopment of the trans-Asia railway should be reconsidered along with the rail lines connected to

seaports, industrial zones and tourist sites, TEDI mentioned These were the major adjustments

recommended by TEDI as a consultant to the Ministry of Transport for Vietnam railway transport

development strategy for 2020, with a vision to 2050

In terms of political risk over the medium term, Vietnam's biggest political question over the coming decade

is whether one-party rule under the Communist Party of Vietnam (CPV) will face growing calls for

democratisation, as was the case in other major South East Asian countries While our core scenario

envisages the CPV transforming itself into a technocratic administration, it faces major economic

challenges which if mismanaged could lead to widespread unrest On the foreign policy front, we expect anincreasingly powerful China to drive Vietnam further into the camp of Asian nations with close relationswith the US

Freight Transport

Vietnam Freight Transport Industry SWOT

Strengths ■ Vietnam's strong domestic growth rate, coupled with its geography - it stretches for

thousands of kilometres on a north-south axis, creates a need for long-distancefreight haulage

the mid-term to 2017

inter-Asian shipping routes, as well as access to the developing land transport links withASEAN countries, allowing the country scope to develop its trade logistics

Weaknesses ■ The generally poor state of the road network Despite new highway construction, only

13.5% of the network is considered to be in good condition Just 26% of the networkhas two or more lanes and only 29% is tarred

being underutilised

that is poor by international standards Overcapacity is a growing problem

access to infrastructure financing means that we remain very conservative on thegrowth potential of Vietnam's freight sector

being the Asian country's largest export partner

Opportunities ■ The beginnings of local commercial vehicle production, which will help improve the

stock of lorries used by road haulage companies

Vietnam Freight Transport Industry SWOT - Continued

sector

International Airport in order to develop infrastructure facilities Under a plansubmitted to the government, 21,000 hectares in three communes in Cam My Districtand seven communes in Long Thanh are to be cleared for establishing new residentialand urban areas, industrial zones, research institutes and international service

centres

Threats ■ Vietnam risks losing out to neighbouring countries if it is unable to develop its

infrastructure to keep up with the pace of demand

the sensitive South China Sea, subject to competing sovereignty claims

transport sector

SWOT Analysis

Strengths ■ The Communist Party of Vietnam remains committed to market-oriented reforms and

we do not expect major shifts in policy direction over the next five years The party system is generally conducive to short-term political stability

Hanoi as a potential geopolitical ally in South East Asia

Weaknesses ■ Corruption among government officials poses a major threat to the legitimacy of the

ruling Communist Party

control over political dissent

Opportunities ■ The government recognises the threat corruption poses to its legitimacy, and has

acted to clamp down on graft among party officials

policies This is opening up opportunities for more checks and balances within theone-party system

Threats ■ Macroeconomic instabilities in 2012 are likely to weigh on public acceptance of the

one-party system, and street demonstrations to protest economic conditions coulddevelop into a full-on challenge of undemocractic rule

in the next few years, over the longer term, the one-party-state will probably beunsustainable

assertive stance over disputed islands in the South China Sea and domestic criticism

of a large Chinese investment into a bauxite mining project in the central highlands,which could potentially cause wide-scale environmental damage

SWOT Analysis

Strengths ■ Vietnam has been one of the fastest-growing economies in Asia in recent years, with

GDP growth averaging 7.1% annually between 2000 and 2012

poverty rate in the country falling from 58% in 1993 to 14.0% in 2010

Weaknesses ■ Vietnam still suffers from substantial trade, current account and fiscal deficits, leaving

the economy vulnerable to global economic uncertainties in 2012 The fiscal deficit isdominated by substantial spending on social subsidies that could be difficult towithdraw

exports, and also keeps import costs high, contributing to inflationary pressures

Opportunities ■ WTO membership has given Vietnam access to both foreign markets and capital,

while making Vietnamese enterprises stronger through increased competition

forward with market reforms, including privatisation of state-owned enterprises, andliberalising the banking sector

urban population rising from 29% of the population to more than 50% by the early2040s

Threats ■ Inflation and deficit concerns have caused some investors to re-assess their hitherto

upbeat view of Vietnam If the government focuses too much on stimulating growthand fails to root out inflationary pressure, it risks prolonging macroeconomicinstability, which could lead to a potential crisis

hold as they struggle to stabilise the economy

Business Environment

SWOT Analysis

Strengths ■ Vietnam has a large, skilled and low-cost workforce, which has made the country

attractive to foreign investors

- makes it a good base for foreign companies to export to the rest of Asia, andbeyond

Weaknesses ■ Vietnam's infrastructure is still weak Roads, railways and ports are inadequate to

cope with the country's economic growth and links with the outside world

Transparency International's 2012 Corruption Perceptions Index, Vietnam ranks 123out of 176 countries

Opportunities ■ Vietnam is increasingly attracting investment from key Asian economies, such as

Japan, South Korea and Taiwan This offers the possibility of the transfer of high-techskills and know-how

liberalisation of the banking sector This should offer foreign investors new entrypoints

Threats ■ Ongoing trade disputes with the US, and the general threat of American

protectionism, which will remain a concern

levels could leave Vietnam a second-rate economy for an indefinite period

Industry Forecast

Vietnam's freight transport sector will benefit from the uptick in domestic growth and the growth outlook ofits two main trade partners, the USA and China, which will drive export growth Vietnam's logistics sectorhas been developing to keep up with the country's increasing role as Asia's factory, especially in the

manufacturing of clothing and shoes Vietnam's connections to its key export partners has been improvingover the past three years, with the country now boasting direct container line services to the US and Europe

Vietnam's economic growth is picking up While the country's economy continued to expand at a reasonable

rate of 5% in 2012, this year marked the second year in which Vietnam's real GDP slowed In 2013, BMI

forecasts the country's economic expansion to get back on its growth trajectory with Vietnam's real GDPprojected to grow by 6.27%

Economic Growth Getting Back On Course

Vietnam Real GDP growth, % change y-o-y

e/f= BMI estimate/ forecast Source: Asian Development Bank, General Statistics Office

The country's medium-term growth will place even more pressure on the country's logistics sector withVietnam's economy forecast to expand quicker over the next four years, with an average growth of 7%predicted between 2013-2017 compared with an average annual growth of 5.9% between 2008-2012.

To keep pace with this growth Vietnam will continue to need to invest in its logistics sector, but BMI

expects a lot of this investment to come from outside logistic and freight transport companies which will bekeen to enter and expand into this high growth market We have already witnessed this to some extent inVietnam's port sector, with considerable investment being made by container shipping lines and global portoperators in the development of modern box terminals at Vietnam's ports

This investment in the country's maritime sector has ensured that Vietnam's manufacturing growth can beachieved with greater links between the country and its main trade partner the US Direct container shippinglinks between Vietnam and the US have been in operation since 2009, which have cut both time and cost, aspreviously Vietnamese shipments had to be transhipped via Singapore

Demand from the US for Vietnam's manufactured goods looks set to continue growing, with Vietnam'sexports set to benefit from the slow, but steady recovery in the US economy We project US economicgrowth to expand by 2.1% in 2013 Over the medium term (2013-2017) we forecast the US economy toexpand by an average 2.4% per annum

China And The US To Drive Export Growth

LHC: Vietnam's Main Export Partners By % 2011 RHC: China and US Real GDP growth, % change

y-o-y

*2012 data is a BMI estimate f = BMI forecast Source: CIA World Factbook, National Bureau of Statistics, BEA

Vietnam's export outlook will also continue to be bolstered by China's growth outlook Although we projectChina's economic growth to slow over the medium term, the country's real GDP growth outlook remainsrobust, estimated at 7.5% in 2013 and 6.4% over the medium term

Vietnam plays a key role in China's coal supply chain Vietnam is China's fifth-largest coal supplier

providing the country with the thermal coal it requires for its power stations Vietnam's role in this supply

chain looks set to continue, although BMI highlights that China is trying to decrease its power sectors'

reliance on coal While we believe that the percentage supplied by coal fired power plants within China'soverall energy mix will slip over the medium term, it will nevertheless remain above 70%

Playing A Major Role In China's Coal Supply Chain

China Coal Imports By Partner 2012 (tonnes)

Source: China Custom

BMI believes that Vietnam's textile sector will also benefit from the development of China's middle class,

as the country starts to import more from abroad

Road Freight

Road Dominates And Offers Best Links Into China

Despite its low standing in road infrastructure, with the Global Economic Forum ranking Vietnam's roads at

123 out of 142 globally, and placing it last in comparison with 13 of its Asia peers, the country's logisticsneeds are primarily met by road

In 2013, we predict that road freight volumes in Vietnam will account for 89% freight carried in the

country

Over the medium term, we forecast road freight volume growth will average 11.7% per annum reaching aprojected 1.3bn tonnes in 2017.

There is, however, upside risk to this forecast as more foreign logistics companies, with considerable road

freight expertise expand in Vietnam Recently, both FedEx and DHL have been expanding their role in

Vietnam While some companies are breaking into Vietnam by developing their own operations in thecountry, others are getting a head start by acquiring and joining up with domestic freight operators This is

the route CEVA Logistics has taken entering into a joint venture with its long-term business partner Indo Trans Logistics Group.

Road freight plays a key role not only in Vietnam's domestic logistics sector, but also in the country's exportsupply chain Road is the main form of transport linking Vietnam's factories to the country's ports and alsoplays a key role in linking Vietnam with its second-largest export partner China.

Vietnam's northern border links the country's with the south of China Road links continue to be developed

between the two and with them trucking services Kerry Asia Road Transport (Kart), for example, offers

a twice-weekly trucking link connecting Shenzhen and Hanoi

Table: Road Freight

Play A Major Role; Mekong Offers Trade Links With Neighbours

Vietnam's inland waterways play a considerable role in the country's freight transport sector making it thesecond-largest freight transport mode in the country In 2013, we estimate that 463.4mn tonnes of freightwill be carried by the nation's waterways, a year-on-year (y-o-y) growth of 5.3% In terms of total freighttransport projections for Vietnam in 2013, we calculate that inland waterways will account for 10.1%

Mekong Offers Trade Connections

Map of the Mekong River

Source: BMI

The country's inland waterways stretch for 17,702km, of which 5,000km is navigable for vessels with adraught of up to 1.8m Vietnam's dense network of waterways ranks its seventh in the world in terms oflength

The country's inland waterways include the Mekong River, which enables freight connections with

Vietnam's neighbours

Table: Inland Waterway Freight

Network Lacking And No Impetus To Develop It

Despite rail's potential as an overland trade link for Vietnam with its three neighbours, the mode's role in thecountry's freight transport sector remains small In 2013, we forecast Vietnam's rail freight volumes toaccount for just 0.8% of the total with the country's rail network transporting just 7.3mn tonnes of freight

Although like the other freight modes, we expect volumes to increase in line with Vietnam's economicgrowth outlook, rail freight volumes (while forecast to grow by 18% over the next five years) will only behandling 8.3mn tonnes in 2017; this is still way below that which we forecast for the nation's other mainfreight modes, road and inland waterways

There are two key factors that we believe have held back Vietnam's rail freight development and willcontinue to do so

Table: Vietnam Transport Network Length (km)

The first is the quality of Vietnam's railway infrastructure The Global Economic Formula gives Vietnam'srail infrastructure a low ranking, placing it 71st globally out of 123 countries measured This ranking places

it 12th out of its 13 Asian peers A major problem for Vietnam's rail freight development is the relativeshortness of the country's rail network Vietnam's railway lines extend for just 2,632km; this compares withthe country's 180,549km network of roads and 17,702km network of inland waterways

The second drawback for freight rail development in Vietnam is its gauge incompatibility with China.Vietnam's network is dominated by narrow gauge, which accounts for 80% of the total While the countryhas some standard gauge track, this system only accounts for 20% of the total

This means that rail freight trade between Vietnam and China is slowed by gauge changes, making roadfreight a more cost- and time-effective alternative; this stymies potential rail-freight projects between thetwo nations

BMI highlights that developments in Vietnam's rail network are taking place, but these have been focused

on expanding the country's passenger network (eg, a planned high-speed railway link between Vietnam andLaos)

Table: Rail Freight

On Growth Trajectory As Vietnam Gets Better Connected

Vietnam's air freight sector may only account for a small percentage of the country's freight transport sector;although this is not expected to change there is a lot of growth potential in this sector As intra-Asia airfreight routes develop, Vietnam is becoming better connected with air freight routes internationally The

key sectors that are demanding air freight as a transport option, include consumer electronics and

pharmaceuticals

In line with Vietnam's economic growth and the projected pick up in international air freight, BMI forecasts

the country's air freight volume growth to strengthen in 2013 We forecast Vietnam's air freight volumes toincrease by 13.6% to reach 203,080 tonnes in 2013 a full recovery on the 10.3% decline recorded in 2012.Over the medium term (2013-2017), we forecast Vietnam's air freight levels to grow on average per annum

by 7.4% and by 42.3% over the full period to reach 254,360 tonnes

There are upside risks to these forecasts stemming from the continued interest of international air freightoperators in Vietnam Throughout 2012, Vietnam's Ho Chi Minh City airport became better connected with

more air freight routes and BMI expects this trend to continue in 2013 and beyond.

Taking Off

Vietnam Air Freight, '000 tonnes

e/f= BMI estimate/ forecast Source: General Statistics Office of Vietnam

BMI expects the increase of air freight connections for Vietnam will come through the development of intra-Asia air freight routes In 2012, Air China Cargo and Malaysia's MASKargo added services to Ho Chi

Minh City

Vietnam is also becoming globally better connected by air In 2012, Emirates added a link with the country and Dubai, and in 2013, Finnair announced that it planned to launch new cargo routes to Hanoi.

While still at the development stage, Vietnam is seeking to play a greater role in the electronics supplychain, a key source of demand for air freight transport options One example has been the impact the localproduction of iPhones has had on China's air freight sector Plans are in place for Vietnam-based facilities toproduce Nokia phones, iPods, PlayStations and Sony laptops, which will all drive up air freight demand

Vietnam's pharmaceutical sector exports much of its output, but the country also imports a lot Vietnam'strade in pharmaceuticals is forecast to grow in the double digits in percentage terms over the medium term.The global pharmaceutical sector is increasingly turning to the aviation sector to meet its freight needs, withthe sector offering savings in transport time, along with environment controlled options, which are vital forthe transport of some medicines and vaccinations

Table: Air Freight

Box Role To Continue Expanding

Vietnam's ports and shipping sectors play a role in the global dry, liquid and container sector As

highlighted earlier Vietnam plays a considerable role in China's coal supply chain, with the dry bulkcommodity being shipped out of Vietnam and into China's main coal port of Qinhuangdao Vietnam is anoil-producing nation, but its consumption needs have come to outweigh its supply and so the country ismaking use of the liquid bulk shipping sector to import oil

It is in the container shipping sector that Vietnam has seen the most development, a trend which is expected

to continue As Vietnam has become the factory of Asia, with an emphasis on the development of clothing

and shoe exports, the country's ports and shipping links have had to keep up As mentioned, considerableinvestment was ploughed into Vietnam's container terminal sector over the past five years, with

international players participating This investment is now starting to yield results, with Vietnam nowdirectly connected to the key demand market of the US (in 2009) and Europe (in 2010)

Getting Better Connected

UNCTADstat Liner Connectivity Index For Asia 2004 and 2012

Source: UNCTADstat

The development of Vietnam's liner connections has been highlighted by data from UNCTAD's linerconnectivity index In 2004, Vietnam was ranked lowest out of its 14 Asian peers in terms of container lineconnectivity, but by 2012, it had jumped up the rankings to eighth place out of its 14 Asian neighbours

Vietnam's growing role in the global container shipping sector is also in evidence in the port of Ho ChiMinh's box throughput In 2013, we expect container volumes to increase by 8% and over the medium term

by an annual average of 7% For more information on data and analysis of Vietnam's shipping sector, please

see BMI's Vietnam Shipping Report.

Table: Maritime Freight

e/f = BMI estimate/forecast Source: BMI, General Statistics Office of Vietnam

Table: Key Trade Indicators

Agricultural raw materials 2010 2011 2012e 2013f 2014f 2015f

Key Trade Indicators - Continued

Agricultural raw materials 2010 2011 2012e 2013f 2014f 2015f

e/f = BMI estimate/forecast Source: BMI, UNCTAD

Table: TOP IMPORT DESTINATIONS, 2004-2011, US$mn

2004 2005 2006 2007 2008 2009 2010 2011

China, Mainland, US$mn, % of

Korea, Republic Of, US$mn, % of

TOP IMPORT DESTINATIONS, 2004-2011, US$mn - Continued

Source: IMF N.B Total exports is from Direction of Trade Statistics, consequently there may be some discrepancy with data used elsewhere in this report

Table: TOP EXPORT DESTINATIONS, 2004-2011, US$mn

2004 2005 2006 2007 2008 2009 2010 2011

China, Mainland, US$mn, % of

Korea, Republic Of, US$mn, % of

Source: IMF N.B Total exports is from Direction of Trade Statistics, consequently there may be some discrepancy with data used elsewhere in this report

Market Overview

Exports Provide Downside Risk

Net exports remain the biggest downside risk to our outlook for the Vietnamese economy although weexpect external demand to pick up as we head into H113, providing a glimmer of hope for the country'sfreight industry Vietnam has been recording an average monthly trade surplus of US$172mn since June

2012 (resulting in a year-to-date surplus of US$77mn) and see the case for a substantial pickup in externaldemand on the back of a rebound in regional growth over the coming month However, we believe thatChina's structural imbalances will return in H213, becoming a drag on regional growth Accordingly, westill expect exports to expand at a moderate pace of 6.5% in 2013

Furthermore, the SBV's aggressive monetary easing cycle in 2012 has yet to achieve the desired effect of accelerating credit growth, as investor confidence remains depressed by uncertainties over the outlook forexports and the build up of bad debt in the banking sector As the accompanying chart shows, credit growthhas slowed from 9.4% year-on-year (y-o-y) in November to 8.9% as of December Despite our view thatcredit conditions should continue to improve over the coming months, we expect credit growth to remainhistorically subdued at 11.0% for the full year, underpinning our benign outlook for inflation

re-Macroeconomic Fundamentals Continue To Improve

We foresee a more stable economic environment in Vietnam over the coming years, brought upon by adecisive shift in the government's focus towards policies aimed at maintaining price stability and ongoingefforts to further address macroeconomic imbalances in the economy In this respect, the government hasmade significant progress in recent years, by tightening monetary policy aggressively in 2011 to cool theoverheating economy The resulting decline in domestic demand eventually led to a slowdown in importsand has helped to reverse the country's stubborn trade deficits into sustained monthly surpluses since June

2012 Latest figures showed that the trade surplus has widened from an average monthly surplus of just US

$1.3bn in 2012 to US$7.8bn in January Initial estimates published by the General Statistics Office (GSO)also suggest a larger trade surplus of around US$9.0bn in February

Secondly, the Vietnamese government has taken a more aggressive stance with regards to speeding upeconomic reforms in 2012, and we expect this trend to remain in play in 2013 and beyond Prime MinisterNguyen Tan Dung approved a master plan in February to further restructure the economy, strengthenoversight of the banking system and establish a roadmap to clean up state-owned enterprises (SOEs) The

plan is expected to be implemented by June We are optimistic that reforms to strengthen regulatory

oversight of the banking system will help to improve the quality of credit and reinstall confidence in thebanking sector

Investors have been staying on the sidelines and are keeping a close eye on the government's plan toestablish a new debt management agency that is expected to consolidate non-performing loans from ailingbanks Progress on this front is encouraging, with the government unveiling plans to launch the debtmanagement agency within a matter of weeks Such reforms will play a crucial role in attracting greaterforeign direct investment (FDI) into Vietnam over the coming quarters, and should complement renewedefforts by the government to speed up privatisation of state-owned enterprises (SOEs) to allow the privatesector to assume a greater role in driving economic growth going forward It is widely expected that at leastseven SOEs will launch initial public offerings (IPOs) in 2013 and another 20 more SOEs could be listed bythe end of the year if the response is favourable

Healthy Medium Term Beckons

Vietnam GDP Year-On-Year Growth

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013f 2014f 2015f 2016f 2017f 4

5 6 7 8 9

Source: Asian Development Bank, General Statistics Office

The economic headwinds that hit the US and the eurozone in 2012 should continue to act as a dampener onexternal demand throughout 2013 to some extent, especially in the case of the US, which is by some

distance Vietnam's top export partner In addition, another of Vietnam's largest export partners, China, is set

to see a GDP growth cool in 2013, as is Japan This suggests that production activity in the manufacturingsector and other export-based industries could face difficulties, with a negative effect on the freight

transport industry expected as a result

The US economy's pace of growth is set to slow over the next 10 years to a long-term rate of 2.4% as

deleveraging from a massive credit binge takes its toll Nonetheless, BMI believes that the US is going to

remain the world's greatest economic power over our 10-year forecast period to 2022 and beyond It must

be borne in mind that if the US sneezes, then figuratively, Vietnam catches a cold This is true in the freightindustry as a slowing in external demand will have a detrimental effect

Over the longer term, imports will be boosted by Vietnam's young population, as younger populations aregenerally more supportive of private consumption The country has a population of 90.7mn, according to

estimates for 2013 by BMI, 60% of which is under 35 We forecast that the population will be 94.1mn by

2017, with 57% under 35, and will rise to 97.7mn by 2022

Road Freight Remains The Dominant Force In Tonnage Terms Road transport is the most advanced in

terms of freight sector privatisation and is by far the dominant mode for freight in Vietnam, with a marketshare of around 75% of domestic cargo Few foreign companies are present in the market and there aremany small, family owned road freight companies operating informally

Investment Needed Across The Board

Vietnam Transport Infrastructure Rankings

* Rail infrastructure is measured out of 123 Source: Global Economic Forums Competitiveness Index

Vietnam has a national road network of 180,549km, according to the latest data provided by the CIA's

World Factbook BMI believes the sector requires substantial investment as the quality of Vietnam's road

infrastructure was judged by the World Economic Forum (WEF) to be very poor, ranking 123rd out of 142countries surveyed in its Global Competitiveness Report 2011-2012

Vietnam's railway transport sector has just one operator, the Vietnam Railway Corporation (VRC),

established in April 2003 as a state corporation operating railway transport and related services Vietnam'srail network totals 2,632km The network is of mixed-gauge, comprising 2,105km of 1.000m gauge and527km of 1.435m gauge

Latest data puts the total amount of airports in Vietnam with paved runways at 37, with seven unpaved Thistotal puts the country in a poor 97th place in comparison with other countries

Road Dominates Freight Mix

Vietnam Freight Transport Mode Breakdown (% of Total 2013f)

Source: General Statistics Office of Vietnam

Vietnam's dense river and canal network provides the country with a highly developed inland waterwaysystem of 17,702km This is the second largest sub-sector involved in domestic cargo transport, accountingfor 25-30% of total transport volumes

Vietnam's seaport network comprises of many small and medium-sized entities, with inefficient

distribution Most large ports are located on rivers, such as Hai Phong and Ho Chi Minh City, with limiteddepth at the entrance Some ports are located in big cities, thus making it difficult to connect with othermodes of transport for cargo transfer due to traffic congestion

BMI does highlight, however, the substantial investments APM Terminal has made in Cai Mep

International Terminal (CMIT) since it opened in March 2011 as an important driver of growth In addition

to helping to construct the port, which it did through a joint venture (JV) with Saigon Port and Vietnam National Shipping Lines (Vinalines), APMT purchased two laden reach stackers, an empty reach stacker, two empty container handlers and a 25-tonne forklift - all of which were delivered by Konecranes in 2011.

Weak infrastructure is one of the main factors holding back Vietnam's shipping sector - the country ranks

111th out of 145 countries on the World Economic Forum's Global Competitiveness Report on the Quality

of Port Infrastructure As such, APMT's commitment to improving CMIT's facilities is an important stepboth for the terminal and the country's shipping sector as a whole

The Vietnamese government also plans to deepen the Port of Ho Chi Minh City's draught, allowing larger

vessels to access the facility BMI notes that these works are badly needed, as we are seeing a growing

trend for shipping lines to order larger container vessels

The ongoing problems evidenced at Vinalines are indicative of a deeper malaise in the Vietnamese shipping

sector State-owned shipbuilder Vinashin was bailed out in 2010 when its US$4.5bn debt threatened to

bring down the entire Vietnamese economy Widespread investment in the country's infrastructure isnecessary if Vietnam is to compete with regional peers

Investment And Development Outlook The Vietnamese transport sector requires vast levels of

investment The majority of infrastructure investment in Vietnam over the next 10 years will be in thetransport sphere, accounting for 65% by the end of 2021 Vietnam still suffers from a significant deficit intransportation infrastructure, and we believe the Vietnamese government will continue to develop thissector over the medium term This is reflected in our forecast for transport infrastructure industry value,which is expected to grow by an average of 3.5% y-o-y between 2012 and 2016

According to our key infrastructure projects database, there are US$171bn worth of infrastructure projectsplanned or currently under way in Vietnam's transport sector One of the most expensive of these is a US

$3.6bn plan to build the Van Phong International Entrepot The project will begin with the construction oftwo deep water ports in Dam Mon that will be able to accommodate container ships with tonnage of 9,000twenty-foot equivalent units (TEUs) and the capacity to handle 0.5mn TEUs per year The project iscurrently suspended, however, due to an ongoing review of geological conditions at the site

The air freight sector will undoubtedly benefit from the planned construction work on a new passengerterminal at Long Thanh international airport Costing an estimated US$6.7bn, the work would also

incorporate a new runway, providing capacity for 100mn passengers a year A tender for investmentconsultancy work was under development as of December 2011

The Vietnamese province of Dong Nai is to clear land near the proposed Long Thanh International Airport

in order to develop infrastructure facilities, it was announced in April 2013 Under a plan submitted to thegovernment, 21,000 hectares in three communes in Cam My District and seven communes in Long Thanhare to be cleared for establishing new residential and urban areas, industrial zones, research institutes and

international service centres The airport, which was approved in 2011 at a cost of US$6.74bn, will be thecountry's ninth international airport, serving 100mn passengers and 5mn tonnes of goods every year afterbecoming operational in 2020.

Industry Trends And Developments

Maritime

Global Economic Pick Up To Support Ho Chi Minh Port Growth

Year-on-year (y-o-y) tonnage throughput growth at the Port of Ho Chi Minh is set to come in at a healthy7.56% in 2013, to reach 38.75mn tonnes, which is slightly down on 2012's estimated y-o-y increase of7.71% Container throughput is predicted to perform even better, forecast as it is to reach growth of 8.22%

in 2013, almost twice as fast as our estimated 2012 expansion rate of 4.35% This will see container

throughput reaching 3.22mn TEUs This faster rate of growth is in keeping with our macroeconomicoutlook on Vietnam, where we forecast that real GDP growth will accelerate from 5.0% in 2012 to 7.0% in2013

This ties in with what we are seeing in the global economy; the US and China are Vietnam's two biggesttrade partners These two markets are essential for throughput at Vietnamese ports as the South East Asiancountry is rapidly becoming the workshop of Asia as the labour market is cheaper than that in China Assuch its container-handling facilities are in demand for finished products to be exported through them Weare more optimistic with regards to economic growth in both China and the US in the coming year; we haverecently revised up our China growth forecast for 2013 from 7.1% to 7.5%, and our US growth forecast asbeen bumped up to 2.3% following the successful avoidance of the fiscal cliff

It is not only the macro picture that is supporting growth at Ho Chi Minh, but also investment in newfacilities at the port complex, centred around the premier commercial centre of southern Vietnam Despite aslow start amid the bleak macroeconomic fundamentals affecting the eurozone, China and the US, there aresigns that Cai Mep International Terminal (CMIT) is beginning to outperform, placing upside risk on ourforecasts for the Port of Ho Chi Minh City as a result We believe that Cai Mep's positive throughput

growth outlook for 2012 is in large part attributable to APM Terminal (APMT)'s operation of the terminal

over the year, as the company has poured in investment and attracted new clients operating on key traderoutes

APMT's presence should support continued growth at the port over the medium term (2013-2017) as itcontinues to improve the port's facilities and attract shipping lines keen to capitalise on Vietnam's positivemacroeconomic outlook Despite being operational for just a year, CMIT likely handled close to

600,000TEUs in 2012

Medium Term: Impressive Growth BeckonsImpressive growth will be the order of the day for the Port of

Ho Chi Minh City over the medium term to 2017 Tonnage throughput will average 6.6% to reach justunder 50mn tonnes by the end of the forecast period - 49.66mn tonnes in 2017 Box throughput, meanwhile,

is also set to remain healthy, averaging 7.0% over our forecast period, which will see throughput reaching

4.51mn TEUs by the end of 2017 BMI highlights the substantial investments APMT has made in CMIT

since it opened in March 2011 as an important driver of growth and believes this will continue to be thecase

BMI highlights that the Port of Ho Chi Minh previously only played a role as a feeder port, relying on the

transhipment of containers through one of Asia's larger, better equipped ports such as Singapore Exposure

to these routes is in large part attributable to the port's ability to handle ultra-large container ships, which arebecoming the standard for shipping containers on Asia-Europe trade routes This was demonstrated in

December 2011, when CMA CGM's 13,820TEU Laperouse docked at the terminal We believe CMIT's

proven capacity for handling these vessels marked an important step for the terminal and will be a keydriver of growth over the medium term

With real GDP forecast to grow at an average annual rate of 7.1% over the medium term and nominal GDPper capita set to increase almost twice as fast, at 13.0% annually, a key driver of this growth will be thecountry's booming export sector, providing a boost to the country's shipping sector, especially the Port of

Ho Chi Minh City

Long Term: Infrastructure Improvements NeededCapacity issues at the Port of Ho Chi Minh are

expected to dog Vietnam in both the short and long term, although Cai Mep provides sizeable opportunities

The solution to this disruptive problem will not just be a small matter of capacity expansion BMI suggests

that the country must also put money into landside supply chain, such as road and rail networks Thesedevelopments are particularly vital if Vietnam is to achieve its aim of enabling Ho Chi Minh to handlelarger container vessels so that it can ship goods directly to destination markets

Growth Potential In The New Factory Of Asia

Vietnam's shipping transport sector will benefit from the uptick in domestic growth and the steady growthoutlook of its two main trade partners, the USA and China, which will drive export growth Vietnam'slogistics sector has been developing to keep up with the country's increasing role as Asia's factory,

especially in the manufacturing of clothing and shoes Vietnam's connections to its key export partners has

been improving over the past three years, with the country now boasting direct container line services to the

US and Europe

Vietnam's economic growth is picking up While the country's economy is expected to expand at a

reasonable rate of 5% in 2012, this year marked the second year in which Vietnam's real GDP slowed In

2013, BMI forecasts the country's economic expansion to get back on its growth trajectory with Vietnam's

real GDP projected to grow by 6.95%

The country's medium-term growth will place even more pressure on the country's logistics sector withVietnam's economy forecast to expand quicker over the next four years, with an average growth of 7%predicted between 2013-2017 compared with an average annual growth of 5.9% between 2008-2012

To keep pace with this growth Vietnam will continue to need to invest in its logistics sector, but BMI

expects a lot of this investment to come from outside logistic and freight transport companies which will bekeen to enter and expand into this high growth market We have already witnessed this to some extent inVietnam's port sector, with considerable investment being made by container shipping lines and global portoperators in the development of modern box terminals at Vietnam's ports

This investment in the country's maritime sector has ensured that Vietnam's manufacturing growth can beachieved with greater links between the country and its main trade partner the US Direct container shippinglinks between Vietnam and the US have been in operation since 2009, which have cut both time and cost, aspreviously Vietnamese shipments had to be transhipped via Singapore

Multimodal

Logwin Reports Growth In Eastern China-Vietnam Trade Lane

Germany-based freight company Logwin has enjoyed growth on its Eastern China to Vietnam trade lane

across a range of industries in 2012, reported JOC at the end of February 2013 The company's managingdirector for the Far East region, Tomas Sonntag, said the industries that have seen growth include IThardware and garments, and this growth has turned the Eastern China to Vietnam route into 'one of thelarger trade lanes in intra-Asia for Logwin'

'This is even more remarkable when you consider that four years ago volumes on this same trade lane werenegligible Manufacturers now actively look at leveraging the lower land and labour costs in Vietnam whilemaintaining their core operations in the Shanghai area,' he added